New Action Fortifies Protections for Vulnerable Homebuyers

Key takeaways:

• Past and forthcoming research by the Atlanta Fed and others has found contracts for deed are disproportionately found in lower-income communities of color and can include undesirable and even predatory elements.
• An August 2024 Consumer Financial Protection Bureau advisory opinion provides measures to protect contract for deed homebuyers.

Homeownership can offer long term financial stability and an ability to generate generational wealth. But research conducted by the Atlanta Fed, Cleveland Fed, Chicago Fed, and others has shown that a certain type of seller-financed home purchase, the contract for deed (CFD), can put consumers at increased risk for loss of both housing and equity.¹ In August 2024, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion addressing many of the disadvantages placed on consumers purchasing a home under CFD. The CFPB also issued a consumer advisory to warn homebuyers about the risks of CFD purchases and to provide them with avenues for redress should they experience problems with their CFD.

What is a Contract for Deed?

A CFD is a type of seller-financed home purchase that can offer fewer upfront fees, faster processing times, and lower qualification standards. However, a CFD also involves high and often hidden risks. With a traditional mortgage, the purchaser becomes the owner and receives a deed to their property at signing. The loan is then secured by that ownership interest. Any equity the buyer acquires cannot be taken by the lender in the event of foreclosure. In contrast, when a home is purchased as a CFD, the buyer agrees to make payments to the seller over a prescribed number of years. Ownership of the property remains in the name of the seller and the buyer does not receive a deed until they pay the full purchase price. Because most CFDs include a forfeiture clause, sellers reserve the right to terminate the contract and evict CFD buyers for a missed payment, with the buyer losing any accumulated equity from increase in home value or home improvements.

The Disproportionate Impact of CFDs on Historically Underserved Communities

A recent Pew Charitable Trusts survey found that purchasing a home with a third-party mortgage lender is the most common type of financing, with around 62 percent of US adults who have ever borrowed to buy a home using a mortgage.² Still, according to the same survey, 14 percent have used alternative financing, including five percent who have used CFDs. The product has been associated with racial discrimination in the housing market for many decades. For example, in the middle of the 20th century, redlining led Black borrowers in cities like Chicago to pursue high-cost CFDs as few alternative sources of mortgage credit existed.³

In 2016, local legal aid attorneys started to report an increase in CFDs in the Southeast, particularly in majority Black communities, a trend we also observed in a paper focused on four southeastern cities.⁴ In many cases, legal aid clients believed they owned their homes yet were treated more like a tenant and being threatened with eviction. In a joint paper by the Atlanta, Chicago, and Cleveland Feds, we found that CFDs in the Midwest tend to be more concentrated in lower-income communities and communities of color with higher rates of housing vacancy.⁵ Along with the Cleveland Fed, we continue to explore this issue in forthcoming research on the actual outcomes of CFDs, which can include forfeiture, the transfer of the deed, or conversion to a mortgage.

The CFPB fortifies Homebuyer Protections

Several agencies have taken notice since the upward trend in CFDs emerged in 2016, including state attorneys general, municipal governments, and regulators such as the CFPB. After reviewing evidence, hosting public forums, and speaking directly with experts, the CFPB took action in August 2024 by issuing its advisory opinion addressing the potential dangers of CFDs and clarifying and affirming that requirements in the Truth in Lending Act (TILA) that offer important consumer protections apply to these transactions.

A core element of the CFPB's advisory opinion affirms the status of CFD transactions as consumer credit under TILA and its regulatory framework outlined in Regulation Z (or title 12, section 1026 of the Code of Federal Regulations).⁶ The advisory opinion establishes that CFDs are a form of credit and that when CFDs are secured by a dwelling they are considered residential mortgage loans. Small scale CFD sellers are not considered creditors under TILA;⁷ however, the CFPB's opinion highlights existing caselaw that applies TILA creditor status to CFD sellers that have only engaged in a single sale but are part of a larger operation of transactions that occur under different entity names, such as a group of LLCs owned by the same person or company. This type of multiple-entity business structure can obscure the extent of any one institution's holdings and activities, as evidenced by research tracking entity networks among large investors in single family rental properties.⁸

As creditors, when engaging in a TILA regulated transaction, a CFD seller must assess the buyer's ability to repay the loan and are prohibited from transacting with buyers whose financial standing does not support the cost of the purchase. The assessment process is outlined in Regulation Z. Atlanta Fed research into CFD purchases has shown that a hidden cost of this credit often lies in a unique element of many CFDs that requires buyers to bring dilapidated properties up to habitable conditions. These repair projects can cost buyers significant amounts of money, and they risk default on the contract if they do not complete the required repairs. Although such burdensome repairs are identified in the CFPB's accompanying research report, the advisory opinion falls short of explicitly naming these costs in its guidance on calculating a borrower's ability to pay.

In addition to assessing a borrower's ability to pay, TILA-regulated CFD sellers are required to provide disclosures to the buyer that illuminate the cost of the credit they provide and ensure that the CFD conforms to limits on balloon payments and other high-cost credit activities. Each of these disclosures can provide buyers with the ability to better understand the nature of the CFD transaction and assess whether their contract for deed transaction is a good financial decision.

The Atlanta Fed's research supports the need for actions that better protect CFD buyers. The CFPB's recent clarifications and measures are intended to hold sellers accountable and target the lack of transparency that can mislead consumers. Given the disproportionate impact of CFDs on buyers of color, lower-income buyers, and others who may lack access to traditional mortgage credit, the CFPB's actions have the potential to protect millions of vulnerable homebuyers.

By Sarah Stein, CED senior adviser, and Ann Carpenter, CED assistant vice president. The views expressed here are those of the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

¹ The contract for deed is also sometimes known as a land contract. For recent Federal Reserve Bank research on the contract for deed, see, for example, Gabriella Chiarenza, "Built to Fail? Contracts for Deeds often sell a Homeownership Illusion," Fed Communities (October 21, 2024), https://fedcommunities.org/built-fail-contracts-for-deeds-often-sell-homeownership-illusion/. For other research exploring the context and effects of contracts for deed see Dan Immergluck, "Old Wine in Private Equity Bottles? The Resurgence of Contract-for-Deed Home Sales in Us Urban Neighborhoods," International Journal of Urban and Regional Research 42, no. 2 (2018): 651-65, DOI:10.1111/1468-2427.12605; Eric Seymour and Joshua Akers, "Portfolio Solutions, Bulk Sales of Bank-Owned Properties, and the Reemergence of Racially Exploitative Land Contracts," Cities 89 (2019): 46-56, DOI:10.1016/j.cities.2019.01.024; Peter M. Ward, Heather K. Way, and Lucille Wood, "The Contract for Deed Prevalence Project, A Final Report to the Texas Department of Housing and Community Affairs (TDHCA)," University of Texas at Austin (2012), DOI:10.13140/RG.2.1.2889.9443.

² "Millions of Americans Have Used Risky Financing Arrangements to Buy Homes," Pew Issue Brief, The Pew Charitable Trusts (April 2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/04/millions-of-americans-have-used-risky-financing-arrangements-to-buy-homes

³ Beryl Satter, Family Properties: Race, Real Estate, and the Exploitation of Black Urban America, New York City, NY: Metropolitan Books (2009).

⁴ Ann Carpenter, Abram Lueders, and Chris Thayer, Informal Homeownership Issues: Tracking Contract for Deed Sales in the Southeast, Federal Reserve Bank of Atlanta (2017), https://www.frbatlanta.org/-/media/documents/community-development/publications/discussion-papers/2017/02-informal-homeownership-issues-tracking-contract-for-deed-sales-in-the-southeast-2017-06-14.pdf.

⁵ Ann Carpenter, Taz George, and Lisa Nelson, "The American Dream or Just an Illusion? Understanding Land Contract Trends in the Midwest Pre-and Post-Crisis," Cityscape 22 no.1 (2020): 37-74, https://www.jstor.org/stable/26915489.

⁶ CFD investors have previously contested this status (see Consumer Fin. Prot. Bureau v. Harbour Portfolio Advisors, LLC, Case No.16-14183 (E.D. Mich. Mar. 14, 2017), https://casetext.com/case/consumer-fin-prot-bureau-v-harbour-portfolio-advisors-llc-1).

⁷ CFD sellers are considered creditors if they regularly extend credit to five or more CFDs secured by dwellings per year, or, if the CFD terms constitute a high-cost mortgage and they regularly extend credit to more than one per year.

⁸ See Taylor Shelton and Eric Seymour, "Horizontal Holdings: Untangling the Networks of Corporate Landlords," Annals of the American Association of Geographers, 114 no. 8 (2024): 1819-1831, https://doi.org/10.1080/24694452.2023.2278690

Public link

Please use the above public link if you want to share this noodl on another website.